Financial Decision Process Via Human Elements - Essay Example

Table of Contents Table of Contents 2 0 Introduction 3 2.0 Types of financial Decisions 3 4.0 Human Elements in the Organization 5 5.0 Impacts of Human Elements in the Financial Decision Process 6 6.0 Conclusion 9 References List 10 1.0 Introduction The profitability of the organization revolves around the smartness of the financial decisions that are made by the key stakeholders. Financial decisions are one of the most sensitive decisions that are made within the organization. The effectiveness and the success of the financial decisions in an organization are affected by many factors. Some of the factors that influence the manner in which decisions are made include economic, cultural, legal, political, social, environmental and ethical factors. These factors are very critical in shaping the types of financial decisions and the process adopted to make them. Financial decisions are made in a systematic process. Organization factions are run by individuals who are entrusted with carrying on the vision and the mission of the company. As such, human elements is one the key components in the formula of financial decisions success. This paper will evaluate the impacts of the human elements in the process of making financial decisions. As preamble, the paper commences by reviewing types of financial decisions that are made in the organization. The financial decision making process is then assessed. The study then evaluates the types of human elements that characterize the contemporary organization. The impacts of the identified human elements are then analysed with the intent of revealing the extent to which they affect the whole process of making the financial decisions. The study then concludes the findings by giving a brief summary of all the main ideas given in the whole study. 2.0 Types of financial Decisions Strategic financial decisions are mainly made by the senior management of the organization after the approval by the shareholders. There are three main financial decisions that are made within the organizations, that is, investment, financing and dividend policy decisions. The investment decisions involve identifying the available opportunities for the investment and investing the shareholders funds in the best investment that has high returns and low risks. The financing decisions are the decisions that are made to identify the possible sources of fund to the organization and then selecting three best source of fund. The main sources of fund for the investment to the organization are commercial loans, organization has retained earnings, fund sourced from the capital market, the grants from other organizations and issuing of the corporate bonds (Cascio, John and Boudreau 2010, p.255) On the other hand, the dividend decisions are the decisions, which are made to determine how the organization will appropriate the profit to the shareholder. There are various dividend decisions that an organization can decide on, which include constant earning policy with bonus (decisions to be giving constant dividend every year), constant growth policy, constant growth with bonus and deciding on the dividend after every financial year. The management makes decisions on the best the decision policy that they should adopt. The dividend policy choosing affects the earnings and the expectations of the shareholders, which in turn affects the availability of the capital to the company from the capital market (Lawler and Boudreau 2012, p.89). The dividend policies are very vital in determining the amount of fund that an organization can raise from the capital market. The three types of decisions serve as the most critical decisions that all organizations have to make. 3.0 Financial Decision Process A financial decision process has different steps that are interrelated and influence one another. The whole decision making process involves the five main steps. These steps are identification of the need, identifying available options, evaluating the available, implementing the chosen decision, monitoring, and evaluating the implemented decisions. Identifying the need to make a financial decision is the first step in making financial decision. The decision makers in the organization come up with the idea and polish the idea. The person who comes up with the financial idea explains the idea to the rest of the decision-making organ of the organization. Sometimes the decision makers solicit for the opinion of all the employees and other stakeholders on the financial decision that should be made (Lawler and Boudreau 2012, p.90). All the ideas are then presented and introduced to the financial decision makers in the decision identification step. After the identification of the idea, alternatives available are evaluated. Every financial idea has many options, for example, if the organization wants to invest, it will have to choose between different investments vehicles that are available in the market. Therefore, this step involves presenting different options that are available to the organization. The third step is evaluating the options and choosing the best idea. In the evaluation, the management or other financial decision makers within the organization considers the returns and the risks that are attached to a particular the decision. All the portions are evaluated on their expected impact to the organization, for example, if the company is looking for the source of fund, it will have to assess the amount of interest that it will pay for various loans against the cost of raising fund using other means such as floating the bonds. The evaluation step is very critical, as it has a direct effect on organization financial stability, for example, for an investment decision and the organization chooses the long investment, it lose much money in terms of opportunity cost. Therefore, the decision makers have to collect all the available information, which will help in decision-making (Cascio, John and Boudreau 2010, p.256). Implementation of the financial decision made is the most essential part of the financial decision making process. After all the information regarding a financial decision has been collected, then the decision aids implemented. All the information must be availed before the implementation. The information regards the specifics of the decision to be implemented including the budget, implementation method, the schedule all the implementation time framework and the persons supposed to implement the decision(Lawler and Boudreau 2012, p.91). The reasons for undertaking the financial decision is communicated to all the stakeholders and each stakeholder in informed on their roles in the implementation process. For example, if the management decided to cut the selling price in order to remain more competitive in the market that decision must be communicated to the employees and to the shareholders. The implementation steps take into account all the risks and other relevant information. After the decision has been implemented, the organization must continually monitor it. The monitoring is undertaken for the whole life of the implemented decision. Monitoring ensures that the decisions are for the benefit of the organization, for example, if the decision involved investing in a particular stock; the company’s investment team continually monitors the performance of that stock. If the stock shows the signs of having, low returns the stock is then disposed of and the money invested in another profitable venture. If the decisions are made, and are not closely monitored, then the effort that has been used in making decisions can prove futile. Monitoring allows continual improvement of the financial decisions that have made to be in line with the objectives of their formation (Huselid 2010, p.640). 4.0 Human Elements in the Organization The financial decision process is initiated by the people in the organization and its implementation and monitoring is done by the people. This makes human resource the most central part of the organization. There are very many elements of human factor that are prevalent in the organization. The human resource has different ambitions, motivation, interests, visions, missions, level of competency and culture. All this factors affect the extent to which they can make sound financial decisions. The management of the organization is tasked with the responsibility of ensuring that all human resource has subordinated their interest to the interest of the organizations (Cascio, John and Boudreau 2010, p. 257). They must ensure that the financial decisions that are made are made for the interest of the organization. Human resource shapes the reputation and the culture of the organization. Culture of the organization is determined by how people in the organization behave, how they do things and the manner in which they exhibit care in their decisions. As such, the organization culture will affect who makes decisions and how they are made. The success of the organization is also affected by the level of exposure that the human resource who are running the organization has. The exposure level affects the reasoning of the employee, their projections and their decisions ultimately. Human elements on the organization are very vital in shaping it only the decision making process but also in overseeing the decisions made (Lawler and Boudreau 2012, p.90). 5.0 Impacts of Human Elements in the Financial Decision Process Many factors that are related with human resource will ultimately affect the manner, type, and process of making financial decisions. One of the key human element that is very vital in the financial decision making process is leadership. Leadership work is to budget, coordinate, plan, organize and direct the subordinates. The subordinates follow the example that is set by their leaders while there are running the day today functions in the organization. The leadership of the organization will initiate the whole process of making financial decisions. If they are not the source of the idea, then they play are very vital role in ensuring that the ideas are clearly screened and evaluated before they are accepted (Huselid 2010, p. 642). The leadership of the organization creates an environment in which the subordinates can come up with the innovative idea that can improve the financial decision-making proves of the organization. In the evaluation and choosing the alternatives, the leadership element in the organization plays a very critical role. The management and other leaders such as the board of governess and the representative of the shareholders ensure that all the alternatives in the decisions are made. They evaluate the total cost of each decision to the organization. This is because the leader of the organisation is held accountable for every decision that made in the organization. Therefore, they must be very careful when evaluating the financial decisions because if the decisions lead the organization into a loss, than the shareholders will hold them accountable (Cascio, John and Boudreau 2010, p. 259). Effective leadership facilitates a good and productive decision-making. If the leaders in the organization have the leadership skills and are very informed, it will lead other into making sound financial decisions. Leadership is very essential in the implementation of the financial decisions made. Leaders determine who and how the decisions will be implemented. After choosing the person in charge of implementation leaders must be satisfied that, the decisions will be implemented according to the planning and as per the purpose of making a decision. A special team of the leaders makes monitoring of the financial decisions, for example, the investment committee in the board of governors is charged with the mandate of ensuring that all the investment decisions that are made are going in the interest of the organization (Lawler and Boudreau 2012, p. 92). Leadership affects every step in the decision making process and there, therefore, affect the productivity and success of the financial decision process. The leaders decide on the experts to consult in the financial decision process, the factors to disregard and the people and external parties to involve. The knowledge and skills of the employees, management and shareholders in the organization have a very big impact in the financial decision making process. A very well informed and knowledgeable staff will make very sound financial decisions. At the identification stage, in the financial decision making process, the knowledge of the staffs is very essential. The employees are able to come up with the innovative ideas that will lead to the success of the organization if they are very well informed. Decisions like dividend policy, needs the impact of the human resource who are amply informed about the impact and effect of undertaking each policy (Huselid 2010, p. 644). The knowledge, skills and competency of the human resource affects the way in which various alternatives are evaluated in the organization. Evaluating the alternatives in the financial decisions requires consideration of all the factors. Making financial decisions involve factoring in many uncertainties that are in the future. The uncertainties are brought about by the economic, legal, political, social, environmental change amongst other factors. Financial decision-making process involves coming up with the model that factors in all these factors. Making the collective predictive model requires high integration of experience, knowledge, skills and exposure. If the model formulated is long, than the organization will have sustained losses, which will cause friction between the shareholders and the management of the organization (Lawler and Boudreau 2012, p. 90). As such, knowledgeable, and skills of the human recourse shapes the manner in which the financial decision process will be conducted. Employees, management skills, and Knowledge management are very vital in monitoring the progress of the financial decisions. In the financial decision made is investing in a certain sector, say real estate, the staffs charged will monitoring the investment be very informed on the current trend and expected one in the industry. In the year 2008/2009 during the global financial crisis, the government bailed out many banks in the United States while other was closed due to lack of predictabilities in the real estate sector. Many banks continued to invest in real estate backed loans despite the existence of the bubble in the sector. When the bubble burst banks sustained much loss (Cascio, John and Boudreau 2010, p. 264). Therefore, the human resource in the organization must predict accurately the direction of the trend in the financial decisions made and make the appropriate decision to shield the organization. Beliefs and culture of the employees is very critical in the financial decision making process. The culture constitutes how the employees and the management behave, how they make decisions and their preferences and choice. If the organization has a culture that allows flow of vertical and horizontal communication, all the employees will be involved in the financial decision process. Integration of all, employees ensures that the decisions are owned by the organization and that each person can take accountability in the decision (Huselid 2010, p. 647). The belief of the management and the subordinates will affect the decision making process, for example, if the management believes that some industries are not good to invest in, even if a good opportunity comes up, the management will not make financial decision to utilise that opportunity window. The culture of the organization has a great impact in the financial ideas that are generated in the organization. If the organization values high ethics, the management will always consider the social and environmental factors while making the decisions. During the evaluation stage in the financial decision-making process, the impacts of the decision made on the society and environment is usually overlooked if the organization does not have a very restrictive culture (Lawler and Boudreau 2012, p. 95). The belief of the key decision makers will make some ideas be processed quickly while another face great opposition, for example, if the company is making the financing decision, some members of the management with the belief against taking the banks loans will oppose using the loans as the source of the business financing. Other human elements that affect the financial decision-making in the organization are motivation, teamwork and relationships in the organization. The motivated employees will make a financial decision making process effective and productive. Employees are motivated in various ways that include, providing good working conditions, competitive compensations, commendation and allowing them room for self-actualization. Self-actualization in the financial decision making process is attained by allowing the input of all the employees in the process (Cascio, John and Boudreau 2010, p. 267). When employees concerned with the financial decisions are involved in the decision making process, they will implement it in an effective and efficient way. Teamwork in the organization is very essential especially when making the financial decisions. Teamwork creates an environment in which delegation of duties as evaluation, monitoring and implementation can be effected. Relationship within the organization affects the extent to which people appreciate the ideas of others. If the organization does not facilitate bonding of the employees then it will not act like one unit. Teamwork ensures that all the financial decisions made owned by all the stakeholders, and they are monitored keenly (Saaty 2009, p. 48). 6.0 Conclusion Financial decision process is a very complex process whose effectiveness is borne by many factors. Human elements are very essential in the whole process. Every decision maker in the organization has varying level of competency, belief and personalities. All these factors must be well integrated together to ensure that every financial decision made is for the interest of the organization. Human elements affect the entire financial decision making process from the identification of an idea to the monitoring of the implemented ideas. In conclusion, human resource elements, must be aligned with the organization l goals in order to achieve and attain a smooth financial decision making process. References List Cascio W, John W. and Boudreau, J. (2010). Investing in People: Financial Impact of Human Resource Initiatives. FT Press, New York. Pp.255-411 Huselid, M. A. (2010). The impact of human resource management practices on turnover, productivity, and corporate financial performance. Academy of management journal, 38(3), pp. 635-672. Lawler, E. and Boudreau, J. (2012). Effective human resource management a global analysis. Stanford, Calif, Stanford Business Books, an imprint of Stanford University Press. Pp.89-102 Saaty, T. L. (2009). Decision making for leaders: the analytic hierarchy process for decisions in a complex world. New York, RWS publications. Pp. 42-51 Read More